The Impact of High-Frequency Trading on Stock Market Liquidity Measures

38 Pages Posted: 13 Jun 2013 Last revised: 26 Oct 2015

See all articles by Soohun Kim

Soohun Kim

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Dermot Murphy

University of Illinois at Chicago

Date Written: June 1, 2013

Abstract

For the highly traded S&P 500 exchange traded fund SPY, we find that, over time, transaction size has been decreasing while the number of consecutive buy or sell transactions has been increasing due to the increased prevalence of high frequency trading and order splitting. Collapsing sequences of buy or sell transactions into single transactions produces a time series that has a time-stationary distribution and is more tractable for empirical market microstructure models. If sequences are not collapsed, measures of illiquidity are underestimated, implying that increased high-frequency trading may not necessarily be associated with improved liquidity.

Keywords: microstructure, liquidity, high-frequency trading, HFT

JEL Classification: G10, N20

Suggested Citation

Kim, Soohun and Murphy, Dermot, The Impact of High-Frequency Trading on Stock Market Liquidity Measures (June 1, 2013). Available at SSRN: https://ssrn.com/abstract=2278428 or http://dx.doi.org/10.2139/ssrn.2278428

Soohun Kim

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 02455
Korea, Republic of (South Korea)

Dermot Murphy (Contact Author)

University of Illinois at Chicago ( email )

2114 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
312-355-4372 (Phone)

HOME PAGE: http://sites.google.com/site/murphyderm

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